Cost Segregation for Fitness Centers

Fitness centers are generally comprised of large open spaces with smaller side rooms for private classes. High end fitness centers may include additional amenities such as; pools, steam rooms, spas, saunas, daycare facilities, snack and smoothie bars, lounge areas, tanning beds, massage rooms, women’s-only workout rooms, indoor running tracks, ball courts and much more. Fitness centers are designed with a substantial amount of additional electrical, plumbing, HVAC and finishes dedicated to the business activity.

Accelerating the depreciation on 20% – 30% of the capitalized costs is typical, depending on the amenities as well as the extent of the site improvements.

Case Study – Fitness Center

Facts

The subject property is a 32,000 square foot fitness center that was acquired in 2015 for $2,300,000. The building is a one-story, steel frame structure, with an elastomeric membrane roof, and with brick and EIFS veneer. Interior finishes include ceramic tile, rubber flooring, wood flooring, mirrored walls, and paint. The interior is wired for television and fitness equipment, and is also furnished with a sauna, swimming pool and basketball court. Site improvements include asphalt and concrete pavement, steel railings, and landscaping.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 10% or $230,000 as 15-year land improvements and 19% or $440,000 as 5-year tangible personal property. Source Advisor’s findings were within the normal expectations for this building type. Since the swimming pool is on the interior of the building, the pool itself may not be treated as personal property due to it being structural in nature; however, the pool equipment does qualify. The property qualifies for 50% bonus depreciation under the PATH Act.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years